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As calls to abolish stamp duty grow stronger in the industry, economists are pushing for a shift to land taxes to cover the shortfall.

Australian Broker recently reported sentiments from a number of brokers calling on state governments to abolish “nefarious” stamp duties.

Economist Leith van Onselen suggests a shift to land taxes would be the most effective way for the government to collect revenue while stabilising housing markets.

“Stamp duty is an inherently volatile source of taxation revenue for state governments, since it is critically dependent on both the volume of housing transfers as well as the price at which those homes transact,” says van Onselen.

With the RBA’s latest decision to keep the cash rate at a record low of 2.5%, while simultaneously highlighting its unease at the ‘uncomfortably high’ Australian dollar, the pressure has been on to find new ways of taking the heat out of the housing market.

The recently released research paper Can non-interest rate policies stabilise housing markets? looked at policies in 57 markets around the world in order to determine which were most effective at stabilising house prices and credit.

Williams College professor of economics Kenneth Kuttner, who wrote the paper with Hong Kong based economist Ilhyock Shyim, says the results were particularly interesting with regard to tax-related policies.

“On the price side we found, taking the global results in totality, that taxes that directly affect the cost of how ownership would be most effective.”

Stamp duties could potentially be one of the tools that could take heat out of the market. According to a further paper by Andrew Leigh of the Australian National University and Ian Davidoff of the IMF, a 10% increase in stamp duty equates to an approximate 3% drop in house prices.

Leigh, however, stresses that the effect on houses is not the most significant effect of a stamp duty increase.

“Our research suggests there are house sales that aren’t taking place because there’s stamp duty in place and that’s leading to a bit of what economists would call a ‘mismatch’ in the housing market - retirees rattling round in houses that are too big or young families squeezed into apartments that are too small.”

According to the research paper, the 37% increase in stamp duty that occurred between 1993 and 2005 – mostly due to ‘bracket creep’ – resulted in close to 40,000 forgone sales.

“I think it’s certainly driving a wedge into the market and having an impact in that first home sales aren’t taking place as a result of stamp duty being in play.”

The ACT government’s move to gradually phase out stamp duty, replacing the revenue via land tax, is the most viable option at this stage, says Leigh.

“Governments have to raise money somehow and you’ve got to recognise that all taxes carry some distortion and government needs to be raising revenue in the least distortionary way.”

A recent report to the treasury detailed the efficiency benefits of a land tax over stamp duties “because it is levied on an immobile base and is difficult to avoid. Stamp duties do not have these properties”.

Van Onselen, however, emphasises that implementing the shift is likely to meet with strong opposition from influential parties.

“ I think it has to do with the difficulty around making all home owners pay taxes on a regular basis, and the fact that those that will be taxed the highest are the wealthy land owners, who tend to be vocal and well-connected politically,” he says.

“The options are there, and with stamp duty revenues remaining volatile and having shrunk in recent years, it is in the state and territory governments’ financial interest to pursue reform and change the tax mix.”

COMMENTS

by John C5/12/2013 9:06:42 AM

Could not agree more. Time for how the taxation system to be restructured to be more attune with the times. Current system is killing the economy.

by Giles5/12/2013 12:44:41 PM

I recall hearing promises from the Govt of the time that the introduction of the 10% GST would result in Stamp Duty and other regressive state taxes being abolished.

Property owners already are taxed enough with out of control local council rate increases, and now the Fire Services levy. Building insurance costs have skyrocketed. The proponents of high population growth claim it grows our economy and everyone benefits. All I see on the news each night is reports of our infrastructure failing across the board, and no money to maintain the infrastructure let alone grow the capacity. Now the economists are claiming that our standard of living will have to fall to compensate.

Since it has become obvious that the states need more tax, then the fairest way is to increase the GST rate, say to 12.5%. Hiking up Land Tax or worse still, applying Land Tax to the family home will just make our expensive housing even more out of reach (for tenants, retirees, families etc). As house prices rise, so does the rate for land tax so what didn't seem much cost at the beginning ends up being hideously expensive later on when we can't do anything about it, an if we are retired then we can't afford it.

Remember the promises of Petrol taxes to be exclusively spent on our roads and public transport. What rubbish. Now we are having to pay tolls to use our roads.

Beware of new taxes, especially taxes that kick in at certain thresholds.

The GST was meant to solve all of these problems.

by John C5/12/2013 4:19:17 PM

Giles, it was & did. In fact the country was comfortably in the black. Thanks to the irresponsibility of the former government we have an Irish/Greek financial deficit so the new government has to find a way to repay this debt. I don't envy the task of the incumbent government.